Current negotiations on Free Trade Agreements

Eugenia Karanikolas, Economics

Key issue
Australia is currently negotiating nine Free Trade Agreements (FTAs) including bilateral agreements with three of its largest trading partners, China, Japan and South Korea. Australia is also part of the negotiations for two mega-regional agreements, including the Trans-Pacific Partnership Agreement (TPP), which focuses on facilitating trade by tackling issues like intellectual property, environment and labour. Contentious negotiation issues include the lowering of hurdles for investment in sensitive areas, reducing protection in agriculture and dealing with investment disputes. More generally, there is a concern that the proliferation of FTAs may result in overlapping trade rules, which may raise transaction costs for business and result in the fragmentation of trade.

Background

Australia has long been a supporter of trade liberalisation undertaken on a ‘non-discriminatory’ basis. Australia has committed itself over the years to reducing its trade barriers and has supported multilateral efforts through organisations such as the World Trade Organization.

In the past two decades, however, there has been a significant increase in the signing of preferential trade agreements, commonly referred to as Free Trade Agreements (FTAs) around the world. This is mainly because the governments of advanced economies have failed to reach agreement with those of less developed economies on the extent to which they will liberalise multilateral trade in sensitive areas like agriculture, intellectual property, investment and services.

Australia’s trade policy has mirrored these international trends with the country now being a signatory to seven FTAs and undergoing negotiations on nine more.

Australia’s FTA debate

Within Australia there is a widely held consensus that international trade is vital for the country’s long-term prosperity. Opinions differ, however, on how trade should best be facilitated—that is, should it be multilaterally or through preferential trade agreements.

Proponents of multilateralism believe that FTAs are predominantly trade distortionary and their proliferation may lead to the creation of competing trade blocs with potential risks to economic stability. The preferential and discriminatory nature of FTAs has also been raised as an issue by the Productivity Commission (PC) which expressed scepticism on the extent to which such agreements have significant net economic benefits to Australia.

The high number of trade agreements among countries in the Asia Pacific has also raised concerns about overlapping trade rules and the effect this has on businesses because of the possible increase in transaction costs. A case in point is Australia, which is currently negotiating on a bilateral level with Japan for two different agreements, the Australia-Japan bilateral FTA and the regional Trans-Pacific Partnership (TPP) agreement. Twelve countries are involved in the TPP negotiations but most market access issues are negotiated at a bilateral level—that is, country to country.

On the other side of the debate, proponents argue that FTAs are complementary to, rather than in competition with, the multilateral system and are essential if Australia is to continue to gain favourable market access for its exports. It is also argued that FTAs provide a more pragmatic approach in facilitating trade. This is because the small number of countries involved makes it easier for an agreement to be reached, and the agreement has a better chance of being higher quality with a broader focus. FTAs, it is argued, are more than just economic documents—they are a tool of economic diplomacy.

Current status of negotiations

In negotiating the current FTAs, some common issues are present, albeit to different degrees. Specifically, Australia is resisting pressure by its partners to include investor-state dispute settlement (ISDSs) provisions, which, in essence, grant foreign investors rights above those afforded to domestic investors. This issue is a significant hurdle in negotiating the TPP because countries like the United States, with its large number of multinational companies, is pushing for such inclusions. In Australia, a number of political and economic institutions, including the PC, have highlighted international evidence showing that ISDSs are risky for sovereign countries. They may be used by foreign companies to restrict the Government’s future ability to introduce welfare-enhancing reforms.

Foreign investment has been another contentious issue, especially with China. In this case, Australia has been resisting China's demands to grant it the same investment rights as those given to the United States and New Zealand, which allow for investments of up to $1 billion not to be screened by the Foreign Investment Review Board (FIRB). This issue has been a focus of recent political and public debate in Australia.

Notwithstanding the significant opposition towards granting China such investment rights, positions are beginning to shift. This shift is possibly prompted by evidence showing that Australia’s foreign investment policies are restrictive when compared to other Organisation for Economic Co-operation and Development (OECD) countries. There is also the perception that FIRB's screenings are more or less routine—only two major takeovers of Australian assets have been rejected since 2001. (For more information, see ‘Australia’s foreign investment policy’article in this publication).

Australia has been pushing for market access for its agricultural goods, especially beef and dairy. This is especially so in the negotiations with Japan, Australia's largest export market for agricultural goods, and Korea. In return, Japan and Korea are asking that Australia eliminates its tariffs on cars.

As part of the TPP, Australia is also pushing for negotiations to be re-opened with the United States regarding market access for sugar, which was left out of the Australia–US FTA. The United States is so far refusing to renegotiate.

Criticisms of FTA rationale and negotiating process

Reports by economic institutions like the PC, as well as business surveys, have not found overwhelming evidence to suggest that FTAs have resulted in significant benefits to Australia's businesses. In its Bilateral and Regional Trade Agreements report, the PC pointed out the lack of transparency in the negotiating process and the tendency by governments to oversell the benefits of FTAs. Based on these findings, the PC recommended that a thorough and independent examination of each FTA should be undertaken at different stages of the negotiating process. It recommended that higher levels of transparency and public accountability regarding the process be adopted so that the public is aware of what the issues are and how much is being spent to facilitate the negotiations.

The Government has signalled its intention to place trade and investment at the centre of its economic agenda. Finalising the trade agreements with China, Korea and Japan has been flagged as a priority. Assuming these negotiations are successful, the Parliament will be called upon to consider legislation which will give effect to these agreements.